Covid-19 Pandemic and the Banking Risk Mitigation: A Lesson from the Indonesian Credit Restructuring Policy

Authors

1 Department of Islamic Economics, UIN Sunan Kalijaga Yogyakarta, Indonesia

2 Department of Islamic Banking, UIN Sunan Kalijaga Yogyakarta, Indonesia

3 Department of Islamic Accounting, UIN Sunan Kalijaga Yogyakarta, Indonesia

4 Department of Islamic Finance Management, UIN Sunan Kalijaga Yogyakarta, Indonesia

Abstract

Countercyclical economic policy is recently highly demanded to mitigate the risk of the Covid-19 pandemic, such the credit restructuring in the banking sector. The policy is necessary, considering that the banking credit risk continues to rise due to increasing loan repayment default of debtors affected by the pandemic. The increasing credit risk in the banking sector however could elevate the economic condition into a high level of systemic risk. Therefore, the purpose of this study is to analyze the impact of credit restructuring policy from the Indonesian government toward the systemic risk from the banks’ exposure. We use the Marginal Expected Shortfall (MES) estimation to measure banking systemic risk along with the amount of credit restructuring, loan, asset, and other influential variables. The results revealed that the only bank with the big asset is beneficial from the credit restructuring program because their risk values decrease coincide with the raise of their credit restructuring amount. But the benefit is invisible from the banks with small and medium amount of asset. However, the overall credit restructuring policy succeeded in reducing banking systemic risk during the Covid-19 pandemic. The policy permits the debtors to postpone their maturing credits so that the banking NPL level is still within a reasonable limit. The government response on the Covid-19 pandemic varies from one country to another, while the credit restructuring policy from Indonesian government is highly rated for the research investigation. The policy should be a global concept for banking risk mitigation during this unprecedented pandemic.

Keywords

Iranian Economic Review

Articles in Press, Accepted Manuscript
Available Online from 05 August 2022

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